Greenspan: Hurry Up, Congress, Clean Up My Mess

Alan Greenspan breaks a record-setting day or two of silence to tell the government to hurry up and pass some bailout, any bailout.

The man who didn't see the tech bubble coming (along with the rest of us) and didn't see the housing bubble coming (we actually caught that one, thanks to our tech bubble whiff), and, just six months or so ago, was predicting smooth sailing just over the horizon, is now convinced we're on the verge of an economic cataclysm. So he wants action. Now:

The U.S. economy is in the grip of the most severe financial crisis since the Great Depression. Even highly credit-worthy businesses are paying unprecedented premiums for borrowing. A large fraction of businesses are shut out of the credit market altogether. Past experience with financial crises shows that overall economic activity contracts soon after the crisis unless swift corrective action alleviates the crisis. Unemployment rises, employment falls, the nation’s production of goods and services declines, and consumers’ purchasing power diminishes. At worst, as in the Depression, the economy collapses.

And then, after this crystal-clear paragraph, Alan pauses for a moment of Greenspannian obfuspeak:

Economists often disagree about the causes of financial crises, including the present one.

That's true. Economists often do disagree about the cause financial crises. But in this case, there seems to be a pretty firm consensus that the cause was...Alan Greenspan.

Anyway, Alan's for the bailout, whatever it is. Here's his full plea, written with George Shultz and Robert Hall.

Economists’ Statement on the Federal Role in Relieving the Financial Crisis

The U.S. economy is in the grip of the most severe financial crisis since the Great Depression. Even highly credit-worthy businesses are paying unprecedented premiums for borrowing. A large fraction of businesses are shut out of the credit market altogether. Past experience with financial crises shows that overall economic activity contracts soon after the crisis unless swift corrective action alleviates the crisis. Unemployment rises, employment falls, the nation’s production of goods and services declines, and consumers’ purchasing power diminishes. At worst, as in the Depression, the economy collapses.

Economists often disagree about the causes of financial crises, including the present one, though many believe that declining housing prices and mortgage practices that amplify the effects of those price declines are central factors today. But there is near-universal agreement that the federal government must take aggressive steps to protect workers and businesses from the harmful effects of a financial crisis. The great majority of those deserving this protection had no role in causing the crisis.

Experience has shown that the essential first step in heading off a crisis is to maintain the functions of critical financial institutions—banks and others performing bank-like functions. These institutions become disabled in a crisis when other institutions lose confidence in their ability to meet their payment obligations. As a practical matter, at the current stage of the crisis, the only way that financial institutions can continue to function is for the government to provide financial support. The traditional form of that support calls for the government to buy assets from the institutions, swapping questionable assets for obligations of the government that are universally regarded as sound.

We endorse all plans that would preserve the key functions of the threatened financial institutions. As a group, we do not advocate any particular program for restoring confidence in those institutions, but we are aware that the traditional approach has succeeded in heading off crises in the U.S. and other advanced countries. We do not take a stand on the choice of institutions eligible for emergency assistance. Rather, we urgently advocate immediate, extensive action that would maintain the functions of credit markets and prevent a serious economic contraction.

We are deeply concerned about instituting reforms for the longer run that will prevent similar crises in the future. We applaud the increases in capital requirements for the institutions that have elected to become subject to the Federal Reserve’s capital requirements. But we do not believe that action to deal with the immediate crisis can wait until a comprehensive program for financial stability in the long run is developed and put in place.

Alan Greenspan, former Chairman of the Federal Reserve Board George Shultz, former Secretary of the Treasury and Secretary of State Robert Hall, Senior Fellow, Hoover Institution and architect of the Flat Tax